RESEARCH AND ANALYSIS

Mineral Trade Policy

Samindra Narayan Mitra, Executive-in-Charge, Chrome and Titania Projects, Tata Steel Ltd.,  & Ph.D. Candidate in Mineral Economics, CEPMLP, University of Dundee

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Mineral trade policy of resource-rich and developing nations across the borders often hinge on curbs to preserve the resources for future domestic use. We need to build it on a strong set of economic rationale.

Minerals, as a set of non-renewable natural resource, are important for industrial and hence economic progress, of a nation. Though the industrial progress of a nation has not necessarily been deterred by the lack of mineral resources within its own geophysical limits; a goal of ensuring ‘sufficient’ present and future domestic availability appears to influence policies in many industrializing countries, especially when they possess substantial mineral wealth in excess of their present demand.

The dilemma often faced by developing (and fast industrializing) countries is whether to conserve their domestic natural resources, primarily minerals, for meeting future domestic demand or intertemporaly shift the production to the present so as to produce surplus to export. Economic growth hardly matches the geographical mineral endowments forcing poor countries to think whether it is worth keeping their resources in-situ for the distant days of demand in their country. The powerful domestic political lobbies, of the mineral exporters and their internal consumers, work at cross purposes. Each tries to steer the Government policies in a direction that ensures their short-term gain.

Domestic policymakers typically respond in two ways:

a. They impose quantitative and/or qualitative restriction on export volume,
and/or
b. They impose an ‘export tax or duty’ payable across the board, presumably to deter exports, and earn high ‘rent’ from super-normal mineral profits.

The impacts of these policies are far-reaching. When exports are restricted in quantitative and qualitative terms or both, it often hinders fair play of market forces as the domestic prices get delinked from world prices. In most such cases an import barrier is raised too. By effectively withholding the national mineral resources from the global economy and prohibiting the domestic mineral producers from accessing international market, such domestic policies create an artificial surplus situation in the country and also distort the global balance that affects trade.

For the domestic consumer industry, these moves are sometimes a boon and sometimes not. If the domestic user industry is a nascent one, the demand does not call for large scale investments and efficient technology in mining, and the loss due to scale and expertise may not be very evident. However, the mining industry failing to attract FDI or global expertise has an adverse effect on the growth of a potentially large mining industry. If the domestic economy is large and growing, it gains in terms of bargaining power and enjoys the minerals at lower than international price. This works as an artificial subsidy.

This policy ‘dilemma’ of resource-rich developing countries may be approached from a broader perspective and with right economic rationale which I would like to enumerate as follows, based on my analysis of economic data:

a) The resource-rich countries benefit in economic and societal terms as much from earning the rents its ‘surplus’ exports generate as by exporting the final output which has gone through several stages of value addition within the country. Several countries’ data have shown this. A strong causal linkage appears with the strength of internal economic and governance systems with growth, rather than with emphasis on value-addition. The manufactured products do not enjoy ‘scarcity rent’ that minerals do, when driven by pure demand-supply balances. While the competitiveness in manufactured goods is driven by industrial competence, that in mineral is largely dependent on the naturally-set characteristics and also by Government policies. Conducive and thoughtful policy-framing catalyzes economic growth. If value-addition is seen as a route to provide employment to large unskilled mass, it ends up being counter-productive.

b) Resource curse is having strong direct correlation with weak, one-sided and exploiting terms in FDI framework that investors take advantage of, and absence of value-addition is only a poor second in terms of explaining lack of economic growth despite being rich in resources. In fact, weak internal systems that dissipate mineral ‘rents’ in unproductive activities or channel them to cross-subsidize weak sectors, support prolific consumption or futile projects, as well as unholy nexus of corrupt power-elites and business houses; are directly responsible for apparent ‘resource-curse’ phenomenon.

c) Exhaustibility is a ‘relative’ concept. As we deplete, we do find more through better exploration and we include poorer grades of ore into our resource base owing to technologies coming up to economically exploit them. Thus, what we think we are saving from the known economic resources for future, is shown to be a very small fraction of the large unknown or presently uneconomic base left in-situ. This is bolstered by the fact that exploration for natural resources is still lacking in these developing countries. So the restrictive policies actually give up profits, not shift them.

d) Analysis shows that a country’s economic growth is neither significantly dependent on its natural resources endowment, nor driven only by it. Japan and presently China prospers by consuming raw materials produced in other countries. However, both countries try to ensure uninterrupted and cheap raw material supply to their domestic plants to avoid scarcity pangs and to obviate hindrance to growth. India, having rich resources, may benefit from FDI inflow into mining sector to explore largely untapped territories and improve productivity in industry, while framing policies that allow reasonably good volume of exports as well as harmonious co-supply to domestic plants without pitting one against the other and apparently trying to choose one option as panacea for all pangs of growth.

e) It may also be worthwhile to judge future demand potential and likely future competitiveness of a country’s own resources before embarking on mindless ‘conservation for future of locals’, only to lose a timely opportunity.

 

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